If you find yourself in a unique situation, keep one question in mind: “If the IRS asks questions, can I justify my actions to the IRS?” A couple of years ago I was asked what the tax consequences are when a Roth IRA is split in divorce. After a pause, I answered honestly: “I have no idea…but will find out.” In fact, there is no specific guidance in the Tax Code or in the regulations on how to handle such a transaction.
So, the Ed Slott team embarked on a full research effort culminating in a lengthy write-up, and presentation. We included multiple examples in our final report, complex hypothetical scenarios, and the rationale supporting our conclusions. Today’s Slott Report entry is not about the details of transferring a Roth IRA via divorce.
However, a summary of some of our conclusions is here:
- For a partial split via a divorce, contributions, converted dollars, and earnings are transferred pro rata.
- The existing Roth IRA can be retitled, or the assets can be moved via direct transfer to the receiving ex-spouse’s account.
- The receiving ex-spouse can choose which 5-year start clock (what we refer to as the “5-year forever clock”) is more beneficial.
- Existing 5-year conversion clocks transfer to the receiving spouse.
Some of our best educational material comes from real-life inquiries. After years of conversations and phone calls and thousands of interactions, we still receive questions and encounter fresh situations. Occasionally, there is no direct guidance on how to handle some of these scenarios. In such cases, we use our best judgment. In the presence of little to no guidance, we ask ourselves, “If the IRS were to ask questions, can I justify my actions to the IRS?”
In fact, another unusual question presented itself just recently. Ironically, it was also predicated on a divorce: “My client owns a stretch IRA that he inherited from his father in 2018, which is before the SECURE Act. He was stretching RMD payments over his own single life expectancy. He recently divorced and the court awarded the entire inherited IRA to his ex-wife. Do we change the single life expectancy factor to her age, or leave it the same?”
This is one of those situations where there is no direct guidance. How do we proceed in a justifiable manner that can easily be defended should the IRS ask questions? What is a reasonable path forward? Our conclusion was this: It is our opinion that the inherited IRA should continue using the original beneficiary’s single life expectancy (the son’s). Since that is the factor currently in place, and since that was the proper factor when the account was inherited, it should remain as-is. This seems like a sensible justifiable solution.
If you find yourself in a unique situation where guidance is limited, first, exhaust all avenues to determine the best course of action. Document your process, and keep one question in mind: “If the IRS asks questions, can I justify my actions to the IRS?”
By Andy Ives, CFP®, AIF®
IRA Analyst
